Think about spending your life constructing wealth, investing in actual property, shares, or what you are promoting, with the hope of leaving a legacy in your youngsters. Then sooner or later, you end up questioning: Will the federal government take a large chunk of it anyway?
In case your property is properly above the federal property tax exemption threshold — $30 million for a married couple in 2026 beneath the OBBBA — you is perhaps asking a really reputable query:
“What’s the purpose of the step-up in foundation if my property nonetheless owes hundreds of thousands in property taxes?”
Conversely, in case your property is properly beneath the federal property tax exemption threshold, you may additionally ask the much more widespread query:
“What’s the good thing about the step-up in foundation if I will not be paying the loss of life tax anyway?”
As a result of I am not useless but, I have not been targeted an excessive amount of on the property tax owed upon loss of life. Nevertheless, like all good pre-mortem planner who thinks in two timelines, it is vital to make clear the confusion and plan accordingly.
Let’s stroll by way of the way it all truly works. I’ll clarify it with three examples, so that you’ll come away understanding why the step-up in foundation nonetheless issues and why property tax planning turns into important the wealthier you get.
The Fundamentals: Step-Up in Foundation vs Property Tax
The important thing to understanding how the step-up in foundation helps, no matter your property’s worth is understanding there are two fully completely different taxes in play when somebody dies:
1. Property Tax – a tax on the complete worth of your belongings at loss of life, in case your property exceeds the federal exemption. This tax is paid by the property.
2. Capital Beneficial properties Tax – a tax on the appreciation of belongings, however provided that these belongings are offered. This tax is paid by your heirs.
When somebody dies, their heirs get a step-up in price foundation on inherited belongings. Meaning the asset’s price foundation is reset to the truthful market worth (FMV) on the date of loss of life. The capital features from the decedent’s lifetime are basically worn out.
When you’re searching for a monetary motive to carry onto your shares, actual property, and different belongings indefinitely, the step-up in price foundation is a compelling one. As an alternative of promoting your belongings, do what billionaires do, and borrow towards them to incur no capital features tax legal responsibility.
I used to suppose it was wasteful for traders to by no means promote and luxuriate in a greater life with the proceeds alongside the best way. But it surely seems, by no means promoting is perhaps the best reward you might go away your grownup youngsters.
Step-up In Foundation vs Property Tax Instance 1: A $50 Million Home
To assist us higher perceive how the step-up in foundation and the property tax threshold works, I need to use an excessive instance. Considering in extremes helps you perceive something higher.
Let’s say you and your partner personal a single home value $50 million. You purchased it many years in the past for $1 million, and it’s now your major residence. You each go away, and your two youngsters inherit the property.
Capital Beneficial properties Tax:
Usually, in case your youngsters offered that home with a $49 million achieve, they’d owe capital features tax — round 20% federal plus 3.8% web funding earnings tax. That’s over $11 million in taxes.
However due to the step-up in foundation, the associated fee foundation resets to $50 million. In the event that they promote the home for $50 million the day after your loss of life, they owe zero capital features tax. Hooray for a tax-free generational wealth switch—only for having the nice fortune of being born to a wealthy financial institution of mother and pa!
Effectively, not fairly.
Property Tax:
Regardless of being useless, you’re not off the hook completely. As a result of your property is value $50 million (you haven’t any different belongings however the $50 million home) and the federal property tax exemption for a married couple is $27.98 million in 2025, the taxable property is $22.02 million.
At a 40% tax charge, that’s a $8.8 million property tax invoice. Ouch.
And right here’s the important thing level: the property tax comes first. It needs to be paid earlier than the heirs get the property — and it’s paid out of the property itself.
So the executor (maybe your youngsters) both:
- Should promote half or the entire home to pay the property tax, or
- Use different liquid belongings within the property (if any) or borrow towards the home
- Borrow In opposition to the Property (Property Takes Out a Mortgage)
- Use Life Insurance coverage (Irrevocable life insurance coverage trusts)
- File a 6-month extension with the IRS and ask to pay in installments
If you’ve got a big, illiquid property, you should plan forward to determine find out how to pay the property tax.
So What’s the Level of the Step-Up?
At first look, this appears discouraging. You continue to owe tax, so what did the step-up even prevent?
Right here’s the factor: With out the step-up, the tax invoice is way worse.
Think about the identical state of affairs, however there was no step-up in foundation. The children inherit your $50M home with a $1M price foundation. Now the whole taxes owed are:
• Property tax: $8.8 million
• Capital features tax (in the event that they promote): 23.8% of $49 million = ~$11.7 million
Whole tax: $20.5 million
That’s 40% of the worth of the property gone to the federal government. With the step-up in foundation, that complete tax burden drops to simply the $8.8 million property tax from $20.5 million.
In different phrases, the step-up in price foundation prevents double taxation. It doesn’t make property tax go away. But it surely shields your heirs from additionally having to pay capital features tax on the identical appreciated worth.
Step-up In Foundation vs Property Tax Instance 2: A $45 Million Inventory Portfolio
Let’s say your web value is usually tied up in tech shares you purchased within the early 2000s. Possibly you bought into Amazon at $50 a share or invested early in a basket of personal AI firms. Now, your portfolio is value $45 million, however your price foundation is barely $2 million.
Whenever you go away:
- Your heirs obtain the inventory with a stepped-up foundation of $45 million
- In the event that they promote instantly, they owe no capital features tax
- Nevertheless, in case your complete property (together with different belongings) exceeds the federal exemption, they’ll nonetheless face property tax on the quantity over the edge
Let’s say your complete property is value $45 million and also you’re married. Assuming you’ve correctly elected portability and the mixed federal property tax exemption on the time of loss of life is $25 million, your taxable property can be $20 million. At a 40% property tax charge, the property would owe roughly $8 million. This tax should be paid earlier than distributions to your heirs, that means they’d obtain roughly $37 million, not the complete $45 million.
The excellent news is that the step-up in price foundation applies to the complete $45 million, not simply the $37 million your heirs truly obtain after taxes. So in the event that they promote the belongings for $45 million, they’ll owe zero capital features tax as a result of their price foundation has been reset to the truthful market worth on the time of loss of life.
With out the step-up, they’d inherit your authentic price foundation of $2 million. In the event that they offered the portfolio for $45 million, they’d owe capital features tax on $43 million in unrealized features. On the 23.8% federal long-term capital features charge, that’s over $10 million in potential tax — on prime of the $8 million in property tax.
Step-Up in Foundation Instance 3: A $4 Million Rental Property
Let’s say you purchased a rental property 30 years in the past for $400,000. Over time, its worth has appreciated to $4 million, and it’s now totally paid off. You don’t have any mortgage, and your complete property—together with this property, some retirement financial savings, and different belongings—is value $5 million.
For the reason that federal property tax exemption for a person is $13.99 million in 2025 (or $27.98 million for a married couple), your property is properly beneath the taxable threshold. Meaning no property tax is due—your heirs get every thing with out the property owing a penny to the IRS.
However right here’s the place the step-up in foundation makes a large distinction:
Capital Beneficial properties Tax With out the Step-Up:
When you gifted the property to your little one whereas alive, they’d inherit your authentic $400,000 foundation, not the $4 million truthful market worth. In the event that they later offered it for $4 million, they’d owe capital features tax on $3.6 million of features. That is possible over $850,000 in taxes, relying on their earnings and state.
Alternatively, for those who maintain the property till your loss of life, then your heirs get a step-up in foundation to the truthful market worth in your date of loss of life — on this case, $4 million. In the event that they promote straight away, no capital features tax is due.
So satirically, doing nothing and holding onto the property till loss of life is usually probably the most tax-efficient technique. So maybe your boomer dad and mom aren’t so grasping in any case for not serving to you extra whereas alive.
Capital Beneficial properties Tax With the Step-Up:
However for those who maintain the property till loss of life, the idea is stepped as much as the $4 million truthful market worth. Your heirs can then promote it for $4 million the day after inheriting it and owe zero capital features tax.
Who Pays What Tax?
- Property tax is paid by the property, if owed, earlier than belongings are distributed.
- Capital features tax is barely paid by the heirs in the event that they promote the asset and provided that there’s a achieve past the stepped-up foundation.
On this third instance, as a result of the property is beneath the exemption restrict and your heirs promote proper after inheriting, neither the property nor the heirs pay any tax. Hooray for not being wealthy sufficient to pay much more taxes!
The Step-Up Is A Present — However It’s Not a Defend
Consider the step-up in foundation as a forgiveness of capital features tax, however not a full pardon from all taxes.
You’re nonetheless topic to the property tax in case your belongings exceed the exemption. However the step-up could make an enormous distinction within the after-tax inheritance your youngsters obtain.
For high-net-worth households, the step-up is important to stop what might in any other case turn into a 60%+ mixed tax burden.
Even for those who don’t anticipate your property to be massive sufficient to set off property tax, the step-up in foundation can nonetheless save your heirs a whole bunch of 1000’s to hundreds of thousands of {dollars} in capital features taxes.
The step-up is likely one of the most highly effective property planning instruments accessible — and a compelling motive to carry onto appreciated belongings till loss of life, particularly in case your aim is to maximise what you go on.
Actions You Can Take To Scale back Your Property Tax
In case your property is properly above the federal exemption — particularly if most of your wealth is tied up in a single asset like a enterprise, property, or concentrated inventory place — it’s essential plan forward to pay the property taxes. Some methods embody:
1. Grantor Retained Annuity Belief (GRAT)
Transfer appreciating belongings out of your property into trusts, like a Grantor Retained Annuity Belief (GRAT) or Deliberately Faulty Grantor Belief (IDGT). These take away future appreciation out of your taxable property.
Instance: Put $1M of quickly appreciating belongings (like shares or actual property) right into a short-term, 2-year GRAT. You get annuity funds again, and the long run appreciation passes to heirs gift-tax free.
- Switch $2M right into a 2-year GRAT
- Obtain $1M/12 months again in annuities
- Asset appreciates 8% yearly
- After 2 years, extra progress goes to heirs estate-tax free
A Revocable Dwelling Belief Does not Scale back Your Taxes
For these questioning whether or not placing your belongings in a revocable residing belief may help you save on property taxes or capital features taxes — it doesn’t. A revocable residing belief is primarily a instrument for avoiding probate, sustaining privateness, and streamlining the distribution of your belongings after loss of life.
Whereas it does guarantee your heirs obtain the step-up in foundation on appreciated belongings (because the belief remains to be thought of a part of your property), it doesn’t cut back your property’s worth for property tax functions. The IRS treats belongings in a revocable belief as for those who nonetheless personal them outright.
In different phrases, the belief helps with logistics and effectivity — not with decreasing your tax invoice. In case your aim is to decrease your property taxes, you may have to discover different methods, comparable to lifetime gifting, irrevocable trusts, or charitable giving, which truly take away belongings out of your taxable property.
2. Annual Gifting
You and your partner can provide as much as $19,000 (2025) per individual, per 12 months to anybody with out decreasing your lifetime exemption. The annual reward restrict tends to go up yearly to account for inflation.
Instance: you and your partner have 2 youngsters and 4 grandchildren. That’s 6 folks × $19,000 × 2 spouses = $228,000/12 months.
Over 10 years:
- $228,000 × 10 = $2.28 million eliminated out of your property
- These presents additionally shift appreciation out of your property, compounding the profit
In case your property is properly beneath the property tax exemption quantity, annual gifting will not make a distinction for property tax discount functions. You have simply determined to assist your youngsters or others now, slightly than after you are useless.
Additional, you are free to present greater than the reward tax restrict a 12 months if you want. Technically, you are speculated to file Type 709 for those who do. Nevertheless, I do not suppose it issues for those who’re manner beneath the property tax threshold.
3. Charitable Giving
Donating a part of your property to a charity can cut back your taxable property and assist causes you care about. Charitable the rest trusts can present earnings for you and a profit in your heirs, whereas decreasing the tax burden.
Instance: You arrange a Donor Suggested Fund and donate $100,000 a 12 months to your youngsters’s non-public faculty for 10 years. Not solely do you assist your faculty, you cut back your taxable property by $1,000,000 and get a board seat. In flip, your youngsters get a leg up in entering into the most effective highschool and schools.
4. Purchase Life Insurance coverage in an ILIT
Life insurance coverage held inside an Irrevocable Life Insurance coverage Belief (ILIT) can present your heirs with liquidity to pay property taxes — with out the proceeds being taxed as a part of your property.
Instance: Purchase a $3 million life insurance coverage coverage inside an ILIT. The belief owns the coverage and receives the payout tax-free whenever you die.
That $3 million loss of life profit can be utilized by your heirs to pay property taxes, so that they don’t need to promote belongings.
Professional: Supplies tax-free liquidity.
Con: You should quit management of the coverage (however can fund premiums by way of gifting).
5. Charitable The rest Belief (CRT)
Place appreciated belongings right into a CRT. You obtain earnings for all times, and whenever you die, the rest goes to charity. You get a partial property tax deduction now.
Instance:
- Donate $5M appreciated inventory
- You obtain $200K/12 months earnings
- Get a charitable deduction as we speak (~$1.5–2M)
- Keep away from capital features on sale of inventory contained in the belief
- Reduces taxable property by $5M
Professional: Provides you earnings, avoids capital features, helps charity
Con: Your heirs don’t obtain the donated asset
6. Household Restricted Partnership (FLP)
Put belongings into an FLP and reward minority pursuits to relations. As a result of these pursuits lack management and marketability, the IRS lets you low cost their worth by 20–35%.
Instance:
- Transfer $20M into an FLP
- Present 40% curiosity to heirs
- With a 30% low cost, worth is reported as $5.6M, not $8M
- Reduces reported property worth considerably
Professional: Retains management whereas decreasing taxable property
Con: IRS scrutinizes reductions — should be achieved rigorously
7. Relocate To A Decrease Tax State Or Nation
Lastly, it’s possible you’ll need to think about relocating to a state with no state property or inheritance tax earlier than you die. There are over 30 such states. When you can efficiently set up residency, your property—and in the end your heirs—might save hundreds of thousands of {dollars} in taxes.
Now, for those who’re a multi-millionaire excited about shifting to a different nation to keep away from property taxes, take into account: there’s no escaping the federal property tax in case your property exceeds the exemption threshold. Even for those who’ve lived overseas for many years, so long as you’re a U.S. citizen, your complete worldwide property stays topic to U.S. federal property tax upon your loss of life.
Nevertheless, for those who formally surrender your U.S. citizenship, the principles change. You’ll not owe U.S. property tax on non-U.S. belongings—solely on U.S.-situs belongings like actual property and U.S. shares. However there’s a catch: in case your web value exceeds $2 million, or for those who can’t certify 5 years of U.S. tax compliance, you’ll be categorized as a “lined expatriate” and could also be topic to an exit tax beneath IRC Part 877A.
This exit tax treats all of your worldwide belongings as in the event that they had been offered the day earlier than you surrender, taxing any unrealized features above a sure exemption.
Remaining Ideas: The Step-Up in Foundation Helps A Lot
In case your property is beneath the federal exemption, the step-up in foundation stays a robust instrument that lets your heirs inherit appreciated belongings tax-free. By holding onto your wealth till loss of life, your heirs obtain a stepped-up price foundation and may keep away from capital features taxes in the event that they promote. In distinction, for those who reward appreciated belongings throughout your lifetime, the recipient inherits your authentic price foundation, probably triggering important capital features taxes upon sale.
As soon as your property exceeds the exemption threshold, the federal property tax kicks in. With out correct planning, your heirs might even be pressured to promote beneficial belongings simply to cowl the tax invoice. The step-up helps, but it surely’s not an alternative choice to a considerate property plan. Methods like GRATs, ILITs, and charitable trusts can dramatically cut back and even eradicate your property tax legal responsibility, however provided that you begin planning early.
Additionally take into account: not all belongings get a step-up in foundation. Pre-tax retirement accounts like IRAs and 401(ok)s don’t qualify. As an alternative, your heirs will owe atypical earnings tax once they withdraw the cash—not capital features.
Your finest transfer? Discuss to an skilled property planning lawyer. We have now, and it made a world of distinction for our peace of thoughts. The step-up might save your heirs from one tax, however the IRS remains to be ready with one other.
Readers, are you now much less upset about your rich dad and mom holding onto their belongings as an alternative of gifting them to you whereas they’re nonetheless alive—due to the step-up in price foundation?
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